Foreign exchange (FX) liquidity plays a pivotal role in any country’s economic stability and growth. As Nigeria takes steps towards improving FX liquidity, it would also be prudent to take steps to reassess and adapt the extant regulatory framework with a view to making the country a competitive destination for global capital flows.
In this update, we reflect on some of the learnings from recent corporate financing and fund formation transactions in sharing some insights around the need for Nigeria’s Central Bank to review its rules around the operation of non-resident accounts.
Current Regulatory Landscape
Presently, Nigeria’s Central Bank restricts access to non-resident accounts for a select few categories. The existing categories are, overseas correspondence and examination bodies, foreign companies executing approved contracts, and foreign professional bodies. While this framework served its purpose in the past, the evolving dynamics of international finance and the shifting sands of global business necessitates a more flexible and inclusive approach. There are atleast 2 corporate financing structures which, in our view, should enjoy the benefit of non-resident accounts. These are:
(a) Venture Capital Investments in Nigeria
International venture capital firms are now a staple locally, investing in funds managed by local managers as well as directly, in local start-ups. For context, African start-ups reportedly raised $6.5billion across equity and debt deals in 2022. Indeed, the amount of venture capital flowing to African start-ups highlights the need for the Nigerian government to introduce policies to encourage the inflow of venture capital and also presents an opportunity to design a policy for FX liquidity management. Our experience, advising on transactions of this nature and interacting with venture capital fund managers suggests strongly that, allowing foreign/non-resident venture capital firms to operate non-resident Naira and FX accounts, presents a compelling opportunity to improve FX liquidity and to propel venture capital investments in Nigeria.
(b) Securitization Transactions in Nigeria
We are seeing an upward turn in securitisation transactions in the local fintech market and estimate that Nigerian start-ups have raised up to $1billion between 2021 via the securitisation route. At the core of a securitisation transaction is a bankruptcy-remote orphaned special purpose vehicle (the “SPV“) which plays a pivotal role in fundraising, purchasing and holding securitised receivables. Our experience, advising on transactions of this nature and interacting with lenders, suggests strongly that allowing the SPV to operate non-resident Naira and FX bank accounts, will drive more foreign direct investments via the securitisation route and catalyse onshore fund management activities. Securitisation transactions are particularly strategic for unlocking foreign direct investment flows not just in fintech but also in the infrastructure, telecoms, electricity distribution, oil & gas and entertainment sectors.
With venture capital investments or securitisation transactions, non-resident accounts presents key advantages for foreign investors. These include:
i)Facilitation of Investment Activities: Non-resident accounts make it easier for foreign investment firms to conduct investment activities in the host country. They can receive and disburse funds related to investments more efficiently and thereby reduce administrative hurdles.
ii)Currency Management: Given that non-resident accounts typically allow transactions in both local and foreign currencies, this level of flexibility enables foreign investments firms to manage their investments in the local currency, reducing the risk associated with exchange rate fluctuations.
iii)Funding Flexibility: Non-resident accounts provide foreign investment firms with the flexibility to fund their investments and operations using various sources of capital, including funds from both local and foreign investors.
iv)Local Presence: Having non-resident accounts can help foreign VC and other foreign investment firms to establish a local financial presence, which can enhance their credibility and relationships with local businesses, entrepreneurs, and other stakeholders.
v)Compliance: Maintaining non-resident accounts often ensures compliance with local financial regulations and tax requirements. Also, foreign investment firms can track and report their financial activities more easily, thereby reducing the risk of regulatory infractions.
vi)Risk Mitigation: Separating funds in non-resident accounts can help foreign investment firms to mitigate risks associated with currency volatility, economic instability, or local financial crises. This segregation provides a level of financial insulation.
vii)Transaction Efficiency: Non-resident accounts typically offer more streamlined transaction processes, reducing delays and administrative costs associated with moving money in and out of the host country and with moving money to portfolio companies.
viii)Enhanced Portfolio Management: Efficient fund management within non-resident accounts can aid foreign investment firms in actively managing their investment portfolios, ensuring they have the resources available when opportunities arise.
iv)Local Investment Partnerships: Non-resident accounts can facilitate partnerships with local investors, startups, and businesses, fostering collaboration and investment opportunities that benefit both the foreign investment firm and the local economy.
Final Remarks
Attracting foreign direct investments into Nigeria should not be a generalised one-size-fits-all proposition. To drive foreign direct investments, a targeted approach is going to be essential. One of such targeted approaches would be to identify and review specific corporate financing structures and to review the legal framework underlying such structures with a view to making those structures more capital-efficient and FDI-friendly.
It should be noted that the use of non-resident accounts as a strategy for driving foreign direct investments is not novel, as this approach has been instrumental in the growth of India’s VC industry, where, amongst others, non-resident venture capital firms are allowed to operate non-resident banks accounts and to appoint a domestic custodian for the securities acquired locally.
Balogun Harold provides this information as a service to clients and other friends for educational purposes only. The foregoing information should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers. Kindly seek professional advice specific to your situation. You may also reach out to your usual Balogun Harold contact or via support@balogunharold.com for support.
